2 LEADERS ARE OUT AT HEALTH GIANT AS INQUIRY GOES ON

By KURT EICHENWALD

Published: July 26, 1997

The executive who became the most visible symbol of profit-driven medical care stepped down yesterday as the top officer of the Columbia/HCA Healthcare Corporation, amid a criminal investigation of whether the company's pursuit of profits has stretched beyond the legal limits.

Richard L. Scott, once celebrated as a visionary reformer of the hospital industry but more recently criticized for his aggressive tactics, resigned under pressure as chairman and chief executive, as did his top lieutenant, David Vandewater.

In the first hours after Mr. Scott's departure Columbia began to undo some of his legacies. For example, it has vowed to be more cooperative with Federal authorities in their investigation, and to halt its widely criticized practice of selling doctors stakes in Columbia hospitals.

In less than a decade, Mr. Scott had built a company he founded with two small hospitals in El Paso into the world's largest health care company -- a $20 billion giant with about 350 hospitals, 550 home health care offices and scores of other medical businesses in 38 states.

The company held itself out as a model for the increasingly cost-conscious world of health care, applying the competitive practices of corporate America to an industry still dominated by not-for-profit institutions. As Mr. Scott acquired hospital companies far bigger than his own, his reputation grew to the point that last year he was named on Time magazine's list of the 25 most-influential people in the country.

But the style that helped the 44-year-old Mr. Scott build Columbia eventually played a role in his undoing. Officials at a number of Federal agencies began investigating whether Columbia hospitals engaged in practices such as fraudulently overstating their expenses to increase their compensation from Medicare, and regularly conducting unnecessary blood tests.

Last week, law enforcement agents raided Columbia offices and hospitals in seven states, seizing documents related to business practices. That was the final straw for the company's board of directors, and led to Mr. Scott's resignation, people close to the company said.

Mr. Scott, a lawyer who had no experience in managing hospitals before founding Columbia, will be replaced by Dr. Thomas F. Frist Jr., a surgeon by training, who has made his career in the hospital business. Now Columbia's vice chairman, he and his father had founded the Hospital Corporation of America, the granddaddy of the for-profit hospital corporations, before Columbia acquired it in 1994.

People close to Mr. Scott characterized his downfall in terms suitable for a Greek tragedy, portraying him as a brilliant and incisive businessman who was undone by his fatal flaws. Those flaws, they said, included an arrogance and aggressiveness that permeated the company. Indeed, in interviews yesterday, Dr. Frist, who has agreed to work without pay, went to great lengths to emphasize that the Columbia of old was dead, and what was emerging was a gentler company that intended to be less combative with the Government, competitors, its employees and the press.

Mr. Scott and Mr. Vandewater ''were the right people at the right time,'' Dr. Frist said. ''But it is time for a different style to take us to the next level, to deal with whatever issues are out there.''

''I have to send a very strong message to Washington that the new C.E.O. of this company is very serious about addressing the Government's concerns, and understands the gravity of the situation,'' Dr. Frist said. ''This has got to be on the top of the priority list.''

Already, Dr. Frist has made several changes with the intent of sending that message. He has hired a prominent law firm, Latham & Watkins, to represent the company and look at the way it does business. A second law firm was hired by a committee of the board to conduct an independent investigation of the accusations against the company.

But most important, Dr. Frist said he was ending Columbia's practice of selling ownership stakes in its hospitals to its doctors. That has been a critical piece of the strategy that helped propel Columbia's growth, but led to great legal and ethical criticism that the company was compromising the medical independence of its doctors. ''This is one that is a no-brainer,'' Dr. Frist said of the doctor partnerships in hospitals. ''They're gone.'' He said that the company would stop selling the hospital partnerships, and over the coming months would unwind those that had already been sold.

As Dr. Frist works to get his arms around the company, people close to Columbia said that some business deals have been put on hold. For example, recent merger negotiations with the Tenet Healthcare Corporation, the nation's second-largest hospital corporation, has been temporarily put on a back burner.

Government officials said yesterday that changes at the top of a major corporation should have an effect on the way investigators dealt with the company. ''The fact that you see a number of search warrants executed here would tend to suggest that law enforcement did not trust top management,'' said one official not directly involved in the case. ''A change like this would make a substantial difference.''